[9] In a market economy, we know that a resource has become scarcer when) a. bot

Question

[9] In a market economy, we know that a resource has become scarcer when) a. both the demand for the good and the supply of the good have b. both the demand for the good and the supply of the good have c. the demand for the good has increased and the supply has d. the demand for the good has decreased and the supply has increased. decreased decreased remained constant. [10] Crowding out occurs when investment declines because a. a budget deficit makes interest rates rise. b. a budget deficit makes interest rates fall. c. a budget surplus makes interest rates rise. d. a budget surplus makes interest rates fall. [11] If the nominal interest rate is 5 percent and the rate of inflation is 2 percent, then the reainterest rate is a. 7 percent. b. 3 percent c. 2.5 percent. d. .4 percent. [12] Jouke is on a temporary layoff from his factory job. The Bureau of Labor Statistics counts him as () a. unemployed and in the labor force. b. unemployed and not in the labor force. c. employed and in the labor force. d. employed and not in the labor force.

Explanation / Answer

9. c) the demand for the good has increased and supply has decreased.

Increase in demand and decrease in supply causes shortage of good in the economy.

10. a) a budget deficit makes interest rate rise.

Crowding out refers to decline of private investment due to fiscal expansion. Fiscal expansion coud be in the form of increase in government expenditure or reduction of taxes. Due to fiscal expansion, there wil be excess demand for goods as a result, unplanned inventory accumulation will be negative. It means that stock of unsold goods decreases, as a result firms produces more of output and increase increases. Increase in income increases demand for money and with excess money demand rate of interest increases. The increase in interest rate crowds out or reduces private spendings particularly, private investment. Due to this full multiplier effect of fiscal expansion is not realised. Although income increases so we can say that it is a case of partial crowding out.

11. Real interest rate = Nominal interest rate - Inflation = 5% - 2% = 3%

12. a) unemployed and in the labor force

Jouke is unemployed. Labor force includes employed and unemployed so Jouke is in labor force.

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